Business leaders to call for review of ‘broken’ rate system

The president of the CBI is to call for an independent review of an “uneconomical, unsustainable and unintelligible” business rate regime that is making the high street crisis worse.

The business group’s president John Allan will tell business leaders on Wednesday the “broken system” had contributed to the failure of struggling retailers such Debenhams, with the long gaps between revaluations adding to the pain being felt by businesses on many British high streets.

“The business rates system has – over time – become uneconomical, unsustainable, and frankly, unintelligible,” Allan, who is also chairman of Tesco, will tell a CBI conference. “Debenhams, once a stronghold of the British high street, fell into administration. But I’ve yet to read an explanation that doesn’t cite business rates as at least part of the cause.”

MPs on the Treasury select committee are investigating the impact of business rates – the commercial equivalent of council tax – and considering alternatives to the property-based tax.

On Tuesday. Kate Nicholls, the chief executive of UK Hospitality, told the committee that the government needed a royal commission to examine the case for business rates, which raise about £30bn a year. “You have a system that is fundamentally not fit for purpose in the modern economy,” she said. “It’s out of date. We need something like a royal commission or independent inquiry because there will be winners or losers from whatever model you adopt.”

Nicholls said the property tax was one of the biggest overheads for hospitality firms, which paid 11% of all business rates despiteaccounting for just 2.5% of business activity. “Rates can be the tipping point between running a profitable business and one that is marginal,” she said. “We lost 4,000 outlets last year on a net basis. That is 10,000 jobs lost across the broader hospitality sector. Something that was set up and is fundamentally unchanged since 1988 doesn’t work for the modern economy.”

MPs have been inundated with submissions from high-profile retailers and business groups suggesting alternatives to the tax. Tesco – which pays about £700m a year in business rates, making it one of the biggest payers of the property-based tax – suggested the government impose a 2% online sales tax to help pay for a cut in business rates for shops.

In a submission published on Tuesday, Sebastian James, the chief executive of Boots, added his voice to the calls for reform, warning that the “increasingly fragile ecosystem” of high streets and town centres was being rocked by unprecedented and far reaching change.

“The rates regime is accelerating the visible decline of high streets in many parts of the UK, with a knock-on impact of increased job losses, lower national insurance revenues and a reduction in apprenticeships and skills investment. Shops are closing and the resulting impact on local communities goes beyond reduced access to products and services,” James said.

Rather than an online sales tax, James suggests the government consider imposing a “business rate levy” on retailers based on their retail turnover. An existing tax collection mechanism such as VAT could be used to collect it with a levy of 1% to 2% raising between £4bn and 8bn. This would apply to all retailers, irrespective of sector or business model, he suggests.

On Wednesday, Allan will cite the thousands of firms that appeal their business rates bill each year as evidence of a growing “lack of confidence” in the system. The government had “tweaked” the regime but there was now a need for a “comprehensive and independent review of the business rates system”. He will say: “The more sticking plasters we add, the greater the signal that the system is broken and in need of a fundamental rethink.”